Significant LB&I Examination Developments

Over the last year, the IRS’s Large Business and International Division (LB&I) has reorganized and started to transition to a new way of examining large corporate taxpayers that it hopes will enable it to more efficiently resolve issues with its increasingly limited resources. The new approach—referred to as a “campaign” approach—has not been fully described or implemented yet, but it is apparent that is not just a reordering of procedures or reshuffling of boxes on an organization chart. Rather, it seems at this point to be a fundamental change of practice. LB&I is moving from a continuous general examination approach to an issue-focused approach under various “campaigns.” There will be many changes in practice. This piece is not intended to cover the entire scope of the changes, but just to highlight three general points that should be considered now. First, the campaign approach may present new opportunities to resolve industry issues on a global basis through Industry Issue Resolution (IIR) procedures similar to the successful insurance industry IIRs for bad debts and Variable Annuity hedging. Second, for those insurance company taxpayers that continue to be examined under the campaign approach, the administrative changes to the exam process will require more and earlier participation by tax departments and supporting actuaries and more and earlier cooperation with IRS examination teams. And third, it is apparent that not all insurance company taxpayers that have been examined in the past will continue to be examined under the campaign approach. This may seem like great news, but it presents some administrative complexities that should be considered and planned for now.

Just what is the campaign approach, and how will it affect insurance company taxpayers? As of the time of this writing, LB&I has only described the overall approach and has not filled in many details, but the approach is part of an overall restructuring of the organization that is public and we at least know who is responsible for dealing with insurance issues and we have some idea of how issues for campaigns will be identified. In general, LB&I has been restructured into five subject-matter practice areas and four geographic practice areas. The subject-matter practice areas are Pass-Through Entities, Enterprise Activities, Treaty and Transfer Pricing, Withholding and International Individual Compliance and Cross-Border Activities. Each subject-matter practice area is led by a director, to whom other directors and senior managers report. The geographic practice areas are Northeast, East, Central and West. Similarly, the geographic practice areas are led by directors who have the titles director, Northeastern [Eastern, Central and Western respectively] Compliance Practice Area. The insurance industry is being handled by the Enterprise Activities Practice Area, which will also handle other financial institutions, financial products and corporate credits. The Enterprise Activities Practice Area is currently led by Director Kathy Robbins, who is located in Houston, Texas. The director who reports to Robbins and is responsible for insurance companies is Gloria Sullivan, who is located in Oakland, California. A senior manager covering insurance, banking and finance will report to Sullivan. The senior manager is Deborah Inganamorte (program manager, Insurance, Banking and Financial Institutions), located in New York City. It appears that Inganamorte will be the point person for insurance issues.

LB&I has not described how they are identifying issues and creating campaigns, but the general idea is described in an internal memorandum entitled “FY2016 Focus Guide,” from the LB&I Commissioner, Douglas O’Donnell, to LB&I staff, published in January 2016. In the memorandum to employees, Commissioner O’Donnell describes the campaign approach as follows:

We plan to use the combined input of our workforce and data analysis to identify areas of noncompliance and strategically focus resources to these areas. Campaigns are intended to:

• Identify specific areas of potential noncompliance,

• Identify intended compliance outcomes,

• Identify specific, tailored treatment streams to achieve those outcomes,

• Identify the resources needed to execute these tailored treatment streams,

• Identify training, guidance, mentors, and other support needed, and

• Effectively use feedback from employees to quickly modify our approach as needed.

The commissioner’s descriptive bullet points for the campaign approach are difficult to interpret without inside knowledge or further explanation that so far has not been forthcoming. However, it seems apparent that personnel with subject-matter expertise in the practice areas described above will identify compliance issues and collaborate with others in the organization to pursue the issues in the particular industry and promote compliance. At one point, there was some discussion of a type of hub-and-spoke system in which examiners would focus on select taxpayers in an industry, identify issues, and then leverage that experience into more limited scope examinations of other industry taxpayers that may have the same issues—this may be one type of “treatment stream” referenced in the commissioner’s comments.